Can Amazon's Streaming Music Service Compete in a Crowded Market?

The already crowded streaming music space is about to become even more packed. Amazon (NASDAQ: AMZN) plans to add a music streaming service for its Prime customers, according to BuzzFeed.

Amazon's offering will be very similar to its Prime Video offering -- it won't have the largest selection of new songs available, but it will offer a mix of older and newer music.

"The Prime music service, which is scheduled to launch this June or July, will not include recent releases but instead restrict its catalog to songs and albums that are six months old and older," music industry sources familiar with the company's plans confirmed to BuzzFeed. Much like the company's video offering, the music service won't strive to be comprehensive.

Prime Instant Video is a sort-of competitor to Netflix (NASDAQ: NFLX) . The on-demand video service is free to customers who pay $99 per year primarily for free two-day shipping on millions of items. The video service (and now the music offering) are free add-ons designed to enhance the value of having Prime. This has become more important as customers for whom Prime was once a no-brainer have shifted some of their purchases to e-books and videos, which are delivered electronically.

Prime Instant Video is not nearly as comprehensive as Netflix, but it's free. So for some people it's good enough and for others it's a nice addition. The music service may not be as good as the other players in streaming right now, but the price will be right.

Who are the competitors?

Amazon's long-rumored move comes at a time when Apple (NASDAQ: AAPL) has signaled its intentions to move into the subscription-based streaming music space by acquiring Beats Electronics for $3 billion. Apple already has a radio-like service with its iTunes Radio offering, but its acquisition of Beats makes it the owner of a subscription-based paid streaming service. Though Beats had only 111,000 subscribers in March, the service gives Apple an entree into a space that has been growing while other segments of the music business are shrinking.

Since Apple -- through its iTunes store -- has been the leader in digital downloads, it makes sense for the company to pursue both subscription-based and ad-supported streaming models. With physical and digital ownership of music being on the decline, it seems possible that the concept of owning music will slowly disappear. This means that revenue from music will be derived from streaming. What remains to be seen is whether anyone can make money on streaming.

The two major players in streaming music are Pandora (NYSE: P) and Spotify. The former serves music based on its users likes and dislikes. People can't pick specific songs but can name artists they like whose music will be put into the mix. Pandora makes money on its free service from ad sales and has a paid subscription offering with an ad-free experience for $4.99 a month.

Spotify offers an ad-supported free model that works somewhat like Pandora, though it allows users to listen to specific artists, but only on shuffle mode. You can picks artists but not specific songs. For $9.99 a month listeners can upgrade to the Spotify Premium and listen to whatever songs they want.

Neither Pandora nor Spotify makes money and neither has a clear path to ever doing so. In fact, both companies lose more money for every user that comes on board (for more on this dubious business model, read Will Pandora and Spotify Ever Make Money?).

Amazon does not need to make money on streaming

The goal of an Amazon streaming service is not to make money. Instead its job is to entice more people to sign up for Amazon Prime, which can be incredibly valuable to Amazon. In 2013 Consumer Intelligence Research Partners estimated Prime members spend more than twice as much — $1,340 per year – than non-Prime members using Amazon.

Amazon entering streaming music is another nail in the coffin for Pandora and Spotify. The online retailer may steal customers from the two established companies not by being better, but by being free. Streaming music is not a business for Amazon, it's a giveaway to enhance its relationship with customers. That may well work for Amazon but it makes it awfully hard for companies trying to find a way to make a profit through streaming music.

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Daniel Kline has no position in any stocks mentioned. He is an Amazon Prime member. The Motley Fool recommends Amazon.com, Apple, Netflix, and Pandora Media. The Motley Fool owns shares of Amazon.com, Apple, Netflix, and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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